Non-Fiat Currency – What is its Legal Character?

In prior posts I have discussed what bit coin is, in terms of describing the technical aspects of the thing. Bit coin is only one of numerous non-fiat currencies which currently exist, and seems to be the most common. In this post I will not be focusing on the technical nature of non-fiat currencies, but rather consider what the character of a non-fiat currency is legally. Stated more directly, is a bit coin legally a currency, security, instrument or something else.

The trick is to realize that there is no coin

Bear with me, because this is a long post.

To state the obvious, bit coin is not a currency in the sense it was issued by a sovereign. However, non-fiat currency is not unheard of in the world. You could argue with a straight face that the game tokens at Chucky Cheese are a form of non-fiat currency. They can be exchanged for value (say a video game or perhaps a trinket) and there is a market to exchange them with others – if you happen to be 10 years old. But to say that a game token is legally the same thing as a bit coin over simplifies that notion that something which represents value and can be exchanged in necessarily a currency.

In reality, anything can retain value and be exchanged for something else of value. This is the basis for early barter system economies, such as the Mesopotamian culture. However, currency has only one imperative, which is to be valuable. Unlike bartering wheat for timber, a currency cannot be used to make bread or build a house. Its only purpose is to retain value.

In the United States, this is enough for the criminal justice system to have determined that bit coin is money for the purpose of the various criminal statutes concerning money laundering, purchase of illegal items, and transferring money to conspirators.

On the civil side of the law, the Courts have yet to settle on a definition of its character. The notion of a bit coin as a currency is, in my opinion, driven by the name itself. If it was called bit-value, bit-stock, or bit-note the immediate perception might be different.

In fact, some forward thinking companies issue Initial Coin Offerings (an “ICO”) which is similar to an IPO, but instead of shares in the company in the traditional sense, the company will issue “coins” to investors which function more as token on ownership rather than as a fungible currency. In using an ICO, the coins are tracked with the blockchain technology allowing for the quick and anonymous transfer of the coins instantaneously to anyone anywhere.

These ICO coins are certainly not currency because they act as ownership stakes in a company and, while they hold value and can be exchanges for value, the ICO coin is not fungible with another company’s ICO coin.

By the same token (pun intended), is a bit coin itself fungible? While one bit coin will equal another bit coin on the exchanges, each bit coin is supremely unique because of its hashing and ownership on the ledger.

Perhaps the hashing is analogous to a dollar bills serial number, but the ownership function on the ledger has no analogous characteristic with currency. Without the ledger there could not be a decentralized ability to transfer a bit coin from one person to another, and without that ability anything of “value” is really worthless. It is therefore, I believe, a central element of bit coin that it requires a ledger, which likes the bit coin to the owner’s wallet.

Equally import is that fiat-currencies are backed by the sovereign while bit coin is backed by nothing but the common belief that it has value.

Both of these issues, I think, sets bit coin apart from a currency, which requires no ledger or mechanism to keep track of ownership and (for fiat currency) requires sovereign backing. While the true owner of the bit coin may remain anonymous, the owner must like his/her wallet and public key to each of his/her bit coin.

What then, if not currency?

As mentioned above, some types of block chained “coins” are much closer to a security than a typical bit coin. In fact, the SEC has recently ruled that these token type coins from an ICO are regulated. However, the bit coin (and similar) are not shares of a going concern which will be run primarily by others from which you hope to capture a gain from such operations.

Rather, its value with only the purpose of being value.

If I may, I think that a bit coin is most like a letter of credit payable in a foreign currency. The obligation of this “bit-letter of credit” would be the bit coin market place. When a bit coin owner wants to cash out, he/she attempts to convert the bit coin into some sovereign currency, say US Dollars, by selling / assigning that “bit-letter of credit” to a person willing to accept the rights to the “bit-letter of credit”.

The letter of credit analogy is supported by the fact that actual letters of credit can be traded in exchange for value. And, if you had a letter of credit payable in Yen, but needed US Dollars, you would be subject to the currency fluctuations among the two.

In fact, the Knights Templar, who pioneered the original letters of credit, allegedly used a cipher on the documents to ensure their validity and kept records on their ledgers. Additionally, these letters of credit were traded as if currency because of the belief in the credit worthiness of the Knights Templar – who were not a sovereign and were specifically not subject to any sovereign by papal bull.

We are still $20 short. Who did not chip in for the tab.

Indeed, the a modern letter of credit can be assigned, and to do so requires notice to the Bank which is recorded on the bank’s ledger. Additionally, a letter of credit is not backed by the sovereign.

For this reason, I think bit coins are most analogous to a letter of credit in terms of its legal character.

Please feel free to disagree or comment below. This in an emerging issue and input is appreciated.

Jason Rodriguez focuses on reorganization and distressed debt litigation as well as lender defense litigation. Having previously represented debtors in bankruptcy and served as a Federal Bankruptcy Court law clerk, Jason now represents banks and lenders in state and federal court. Jason is a member of the John C. Ford American Inn of Court, Turnaround Management Association, Dallas Area Young Bankruptcy Lawyers, among others. Jason has appeared and argued before courts across the country. To learn more about Jason, visit the Firm’s website.